Financial reform

Reality check at the IMF

The fund needs a gentle overhaul, not a fundamental rethink

THE International Monetary Fund cannot seem to win. Every financial crisis is the cue for the world's economic Pooh-Bahs to declare that the organisation desperately needs reform. This year there is a conspicuous lack of crises, and yet, as they prepare for the IMF's spring meetings this weekend, the great and the good are at it again. Mervyn King, governor of the Bank of England, says the fund's role is obscure. Tim Adams, the main international man at America's Treasury, has accused it of being “asleep at the wheel”. Critics warn that the IMF faces irrelevance unless it reinvents itself radically.

That seems an extraordinary assertion. Less than a decade ago the world was rocked by emerging-market financial crises in which the fund was called on to save the day. Thanks to today's abundant liquidity, emerging economies have enjoyed easy access to private capital and hence no need for the IMF. But no one expects such liquidity to last forever. A temporary lack of fires does not remove the need for a fire brigade.

So what is really prompting the calls for reform? One disreputable reason to change is the internal workings of the IMF's budget. Bizarrely, the IMF makes money to pay for its staff only when it lends to countries in crisis. The lack of recent crises means the organisation faces a 30% drop in its income over the next two years. That suggests the IMF needs a new source of money, not a new role.

On two counts, however, the critics have a point. On the world's most intractable macroeconomic challenge, unwinding the imbalances between excessive borrowing in America and excess saving elsewhere, the IMF has almost no clout. Worse, many of the fund's potential clients in the emerging world are the most excessive savers. They are doing their best to ensure that they never have to turn to the IMF again, by building up enormous foreign-exchange reserves, a hugely expensive and inefficient use of their resources (see article).

Most financial bigwigs think the fund's future lies in helping to sort out the big global imbalances. Mr King wants the IMF to follow Keynes's dictum and offer “ruthless truth-telling” when countries are going wrong. Endless proposals offer advice on improving “multilateral surveillance” and on making the IMF's board more independent.

Sadly, the fund's ability to tell rich countries what to do is extremely limited. Rich countries have not borrowed from the IMF in decades and will be deaf to the fund's wise words unless it suits their own domestic interests. Only if the fund had the ability to punish non-borrowing members (as, in theory, it did in 1944), would the focus on “surveillance” amount to much. But no rich country will give the IMF that power. It is naive to believe the fund can become a global financial guardian.

The IMF's future—rather like its recent past—lies with emerging markets, where access to international capital is more precarious than you might think. Should global financial conditions become less forgiving, many countries—whether Indonesia, Hungary or even Brazil—might once again need access to the IMF's cash. Even the strongest would be better pooling risks within the IMF than going it alone by building up huge independent reserves.

For that to happen, emerging economies must believe the IMF represents them. This calls for a shift of power away from Europe. It is absurd that Brazil, China and India have 20% less clout within the fund than the Netherlands, Belgium and Italy, although the emerging economies are four times the size of the European ones, once you adjust for currency differences. Emerging countries are keen to contribute more cash (and thus get more votes), and they have the support of Rodrigo de Rato, the IMF's Spanish boss. The Europeans, too, should support this reform. A smaller voice in a useful organisation is better than power over a moribund one.

An IMFurance policy

With more sway over the fund, emerging economies could shift the organisation's priorities. One sensible idea, recently raised by the IMF's chief economist, would be to pool some of their reserves in the IMF, in effect, using it as an insurance facility that offers rapid access to cash if strong economies are hit by financial turbulence. Some rich countries worry about the perverse incentives that would create. It is a dilemma: the risk is real, but so is the cost of a crisis. If many of the fund's clients want such a scheme, rich countries should not block it.

Doubtless, the agitators want much more. But, unlike their grand ideas, giving emerging markets a bigger voice and useful products would at least make the IMF more useful.